Adjustable versus fixed rate loans

With a fixed-rate loan, your monthly payment stays the same for the life of your loan. The amount of the payment allocated to your principal (the actual loan amount) will increase, but your interest payment will go down in the same amount. The property taxes and homeowners insurance will go up over time, but in general, payment amounts on fixed rate loans change little over the life of the loan.

Your first few years of payments on a fixed-rate loan go mostly toward interest. As you pay on the loan, more of your payment goes toward principal.

You can choose a fixed-rate loan in order to lock in a low interest rate. Borrowers select these types of loans when interest rates are low and they want to lock in at this lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer more consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we can help you lock in a fixed-rate at the best rate currently available. Call 1st Credential Mortgage Inc at (281) 778-0805 for details.

There are many different types of Adjustable Rate Mortgages. ARMs usually adjust twice a year, based on various indexes.

Most Adjustable Rate Mortgages are capped, which means they won't go up above a certain amount in a given period of time. Some ARMs can't increase more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" which ensures your payment will not go above a fixed amount over the course of a given year. In addition, the great majority of ARMs have a "lifetime cap" — your rate won't exceed the cap amount.

ARMs usually start out at a very low rate that may increase as the loan ages. You may have heard about "3/1 ARMs" or "5/1 ARMs". In these loans, the initial rate is fixed for three or five years. After this period it adjusts every year. These types of loans are fixed for a number of years (3 or 5), then they adjust. Loans like this are usually best for borrowers who anticipate moving in three or five years. These types of adjustable rate loans most benefit people who will sell their house or refinance before the loan adjusts.

Most borrowers who choose ARMs do so when they want to take advantage of lower introductory rates and do not plan to stay in the house longer than the introductory low-rate period. ARMs can be risky if property values decrease and borrowers cannot sell their home or refinance their loan.

Have questions about mortgage loans? Call us at (281) 778-0805. We answer questions about different types of loans every day.

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